The Effectiveness of Public Subsidies for Private Innovations. An Experimental Approach

Brüggemann Julia () and Proeger Till
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Brüggemann Julia: Faculty of Economic Sciences, Georg-August-Universitat Gottingen, Platz der Gottinger Sieben 3, Gottingen37073, Germany
Proeger Till: Faculty of Economic Sciences, Georg-August-Universitat Gottingen, Platz der Gottinger Sieben 3, Gottingen37073, Germany

The B.E. Journal of Economic Analysis & Policy, 2017, vol. 17, issue 4, 21

Abstract: The effects of public subsidies in supporting innovative activity are subject to long-standing debates. Since empirical findings remain largely inconclusive, this study adds to this debate with counterfactual evidence from a laboratory experiment. In a creative real effort task simulating the innovation process, two distinct means of allocating subsidies are compared to a benchmark treatment without subsidies to identify their effects in fostering innovativeness. Furthermore, subjects’ cooperative behavior in relation to subsidies is investigated. Overall, subsidies lead to a substantial crowding-out of private investment. While the individual revenues increase due to the subsidy, the innovative activity fails to increase and less sophisticated innovations are realized. Consequently, subsidies have no or negative effects on overall welfare, depending on the subsidy specifics. However, subsidies do not influence cooperative behavior. These findings imply that the additional costs of subsidies for innovations might not be warranted by gains from additional innovations and increased welfare.

Keywords: creativity; innovation policy; laboratory experiment; real effort task; subsidies (search for similar items in EconPapers)
JEL-codes: C91 H25 O31 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1515/bejeap-2016-0089

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